Price near floor of falling trend

Falling trends indicate that the company experiences negative development and decreasing buy interest among investors. Falling trends signal that the stock price will continue to fall within the trend channel.

Price near floor of falling trend When the price is near the support of the trend channel floor, the upside to the ceiling of the trend channel is quite large. The stock may then see a short term rise.

However, buying near the floor can be a bad strategy, especially in the long term. Two of the most common mistakes investors make are that they hold on to losing stocks for too long and that they are tempted to buy into stocks that are “cheap” after a fall. A stock in a falling trend keeps falling for much longer than many investors think it will. Long term investors would be smart to stay away from stocks in falling trends, even if they are near the floor.

Short term buys near the trend floor can also be a bad strategy. When the price is near the floor, there is a big possibility of a break downward, compared to when the price is in the upper third of the trend channel. A break downward will be a new sell signal and indicate an ever steeper fall in the time ahead. Consequently it will often be a bad idea also for short term investors to keep a stock near the floor of a falling trend channel. This is especially the case for stocks in small and medium sized companies, where there is generally high risk for bigger price fluctuations.

In Investtech’s analyses, stocks in falling trends are equally negative, regardless of whether the price is near the floor, ceiling or in the middle of the trend channel. A stock is classified as “near trend floor” if it is in the lower fifth of the trend channel.

Special circumstances

The upside can be very good when the price is near a trend floor. This makes it tempting to buy stocks in such cases. Buying such stocks can be justified if volume development indicates a coming mood reversal and there are potentially positive fundamental indicators.

However, do mind the very high risk. Price near trend floor in a falling trend gives a high chance of a break downward, but also good potential for a reaction upward. It is considered less risky to buy near trend floor in a falling trend which is almost horizontal than in a trend that is falling sharply.

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